Could 86% of PPP loans be converted into grants? Mnuchin supports automatic forgiveness for certain PPP loans
To date, the Paycheck Protection Program (PPP) loan program has granted over 4.6 million loans, for a total of over $ 520 billion. As the program was put into practice and suffered from a difficult launch, he was lauded for helping small businesses keep their doors open and keep employees out of unemployment.
The program was so successful that the the first slice of money quickly dried up, requiring another round of funding. Now, however, the reality of processing these loans makes some organizations question how effectively such a large number of loans will be managed.
Call for the surrender of the PPP loan
Last month, two bank lobbying organizations called on Congress to automatically cancel PPP loans under $ 150,000.
At the time of the proposal, records showed that PPP loans below $ 150,000 represented about 86% of the loans granted under the PPP loan, but only 26% of the loan dollars. Or to put it another way, only 14% of total loans represent 74% of funds borrowed under the program.
These small loans are the least profitable for banks to manage and can place an administrative burden on small businesses at a time when many are struggling.
the lobby group wrotee that “the time and resources of small business owners would be better focused on getting the economy back on track safely, rather than dealing with tedious paperwork.”
Yesterday Treasury Secretary Steven Mnuchin seemed to support this proposal by testifying before Congress. He suggested that not all PPP loans should be verified. He went on to sayOne of the things we’re going to talk about is, should we just get forgiveness for small loans? I think this is something we should consider.
Mnuchin recommended that any forgiveness program should include fraud protection. He then recommended additional targeted loans to help small minority-owned businesses and allow businesses in particularly affected sectors to apply for a second PPP loan. Any additional loan would include provisions to help prevent fraud, waste and abuse.
The program’s forgiveness rules are complicated
Small enterprises may have all or part of their PPP loan canceled if they meet certain criteria. These rules have changed several times since the program’s inception, confusing many small business owners.
In short, some or all of the funds borrowed under the PPP loan program may be forfeited if 60% or more of the funds have been used for salary expenses. Remaining funds must be used for eligible expenses in order to be forgiven. These eligible expenses include rent, utilities, and mortgage interest payments.
Of course, there is a lot of fine print, which is covered in detail in this article, by Forbes Contributor Brian Thompson.
The five-page PPP loan forgiveness application can be found on the SBA website.
Forgiving Smaller Loans Would Benefit More Than Just Small Business Owners
Forgiving loans under $ 150,000 could ultimately benefit small business owners, banks and even the government.
These loans represent only 26% of the funds provided under the PPP loan program, however, they represent 86% of the total number of loans. It is a heavy administrative burden to represent such a small percentage of total funds.
Providing a blanket discount for these loans, or loans below a similar threshold, frees up both bank and government resources for processing higher value loans. It happens at a time of increased monitoring of companies that have received large PPP loans.
Government resources would be best served by focusing on larger loans and investigating potential frauds, including possible frauds below any potential forgiveness threshold.
Banks will benefit because of the reduction in overheads. The banks are ultimately responsible for determining the cancellation of the loan. PPP loans that are not canceled are converted to a 2-year or 5-year loan at 1% interest. A study by the consulting firm AQN Strategies estimated that the cost of managing PPP Loans of less than $ 50,000 will be ultimately cost the banks around $ 500 million. Forgiving these small loans will save banks millions of dollars.
Finally, small business owners would also benefit greatly from a general pardon. This would remove the burden of requesting a loan forgiveness and allow business owners to focus on keeping their businesses operational at a time when many owners are pressed for time and resources.